Gold Market - Alternative For Porfolio Diversification
Written by Jack Wogan   
Sunday, 04 July 2010 07:55
The investment strategy with the highest chance of success is portfolio diversification. It basically means that instead of buying shares belonging to a single company, an investor chooses to acquire shares from two or several companies from different fields of activity. This strategy has two main advantages. First is risk mitigation - in normal economic environments the chance for two different companies from two different economic fields to fail is significantly smaller than the chance of one company going down. Second is increased return of investment. When things go well and both companies achieve their targets, dividends come from two or multiple sources, which is good for the investor.
by JackWogan


The investment strategy with the highest chance of success is portfolio diversification. It basically means that instead of buying shares belonging to a single company, an investor chooses to acquire shares from two or several companies from different fields of activity. This strategy has two main advantages. First is risk mitigation - in normal economic environments the chance for two different companies from two different economic fields to fail is significantly smaller than the chance of one company going down. Second is increased return of investment. When things go well and both companies achieve their targets, dividends come from two or multiple sources, which is good for the investor.

The value of shares may go up and down because of many factors, out of which the predictability of the economic environment, the competence of the management team, and pure good or bad luck are just the most common. Examples are not hard to find to support this.

Examples are close at hand. For quite some time, British Petroleum continues to be the center of attention because of the Gulf of Mexico oil spill the company is involved in. Markets reacted promptly to this and the company lost 22 percent or approximately USD 40 billion from its market share in only nine days, leaving shareholders with the legitimate question whether the PB shares will recover from this shock and with what price.

Governmental bonds are subject to the same type of uncertainty, although state bonds are by default perceived as safer compared to share stock in terms of protection against market variations. Bonds can be a safe investment vehicle, unless they are issued by countries in difficult economic conditions, confronted with social turmoil and downgraded by country rating agencies, as in the case of Greece. Greek bonds were perceived by Bloomberg and the European Federation of Financial Analysts Societies as the "the worst-performing government debt in the world", no farther than last December.

During such times, the alternative is turning to the gold market. The value of gold as commodity is based on the market mechanism, which makes speculation difficult. Moreover, the price of gold has been increasing steadily for very long periods of time, and with percentages which always covered the price of inflation. This makes gold one of the few investments able to protect against currency depreciation.

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Learn from professionals how to buy gold bullion in times of recession.